Hi, George4Tacks,

Thank you for your reply.

You are right... this question is hard to ask.

I will try to clarify.

The individual moves from California to Texas.

He creates a new Texas S corporation to acquire his old California S corporation's interest in a California LLC taxed as a partnership.

The LLC has California income that it reports on the Texas S corporation's K-1.

The Texas S corporation zero's out its K-1 income by paying the same amount of wages to the employee/shareholder, now a Texas resident.

Thus, the Texas S corporation has no income to be taxed in California.

The individual performed no services in California related to this income.

So, under the rules, as I understand them, even though the income is sourced in California at the LLC and Texas S corporation levels, he, as a W-2 employee, because he did not perform services in California, is not taxed on that income in California.

It seems like the result would be the same if it was a California S corporation that zeroed out its income by paying it all out as wages to the Texas resident employee/shareholder.

I am just looking to see if I have this right.

Also, a new question comes to mind... will the LLC be required to withhold tax on distributions to the Texas S corporation as a non-resident partner? I think so.